I am a CPA in Texas with an MBA from the University of Chicago. I have seen a lot and made many mistakes. Hopefully by now I will have learned something from them. Just as importantly, you may learn something from my mistakes. You can e-mail me by clicking on my "View my complete profile".

Monday, September 1, 2008

Saving Sergeant PCAOB

"A federal appeals court Friday rejected a constitutional challenge to the Public Company Accounting Oversight Board [PCAOB], which oversees U.S. public-company accountants. In a 2-1 decision, the U.S. Court of Appeals for the D.C. Circuit ruled that the private non-profit board doesn't violate the presidential-appointments requirements of the U.S. Constitution. The challengers plan to appeal, possibly to the Supreme Court. ... Free-enterprise groups joined with Beckstead & Watts LLP, a small Nevada accounting firm, to challenge the oversight board on constitutional grounds. ... The majority ruling disagreed, finding that the SEC's authority over the board is 'explicit and comprehensive' and 'extraordinary,' and it doesn't infringe on the president's broad-ranging authority. ... Judge Brett Kavanaugh dissented from the majority opinion in a 58-page rebuttal, saying the board plainly violates the appointments clause of the Constitution", my emphasis, Judith Burns at the WSJ, 23 August 2008.

This is another no-brainer decision, right out of Alice in Wonderland. Kavanaugh is right. So? What is the PCAOB? A Big 87654 tool. It harasses small CPA firms and does nothing to the Big 87654. Let's consider its "reviews". The Big 87654 audit 98+% of US publicly-held companies by market cap (MC). Three small firms audit less than 1%, 1300 tiny firms audit less than 1%. The PCAOB concerns itself with "process", not the substance of audits. The total US MC is about $15 trillion. Suppose the PCAOB wants to "review" 1000 audits a year, audits not firms, audits, that's one review per $15 billion in MC. Exxon's audit, with $415 billion in MC will be selected 28 times ($415 / 15 = 27.7). Similarly, say Microsoft will be selected 17 times ($252 / $15 = 16.8), etc., etc. I suspect only about 300 reviews need be performed. As to the three small firms, if they audit $150 billion in MC, only a total of ten of their audits will be reviewed, ($150 / $15 = 10), similarly for the 1,300 small firms, ten reviews amongst the lot of them. What is the PCAOB doing? Stepping on ants while the elephants dance. Imagine, a tiny firm will have a .0077 (10 / 1,300) probability of having one of its audits reviewed. From my perspective, 99% of the PCAOB's work on the 1300 is pure waste. Hey Olson, did you hear that?

Talk of regulatory capture. What percentage of PCAOB employees are "former" Big 87654 partners? If I ran the PCAOB, I would not hire any one who worked for the Big 87654 in the last 10 years! Is the PCAOB the Big 87654 cartel enforcer? If not, what is it? Did the PCAOB ever make a finding a plaintiffs' law firm could use to sue a Big 87654 firm or make a criminal referral to the DOJ? If not, after six years, who needs these useless paper shufflers? I read the 92-page opinion including Kavanaugh's 58-page dissent. It's at: http://pacer.cadc.uscourts.gov/common/opinions/200808/07-5127-1134687.pdf. My short version: Janice Brown, formerly of the California Supreme Court, did as instructed, she came up with whatever rationalization she felt she needed to keep this useless beast alive.